Foreign investors sold Rs 17,417 crore of Indian government bonds in September and October. The trend follows a delay in India joining the Bloomberg Global Aggregate Index and pressure from rising US bond returns.
Foreign Portfolio Investors (FPIs) have pulled Rs 17,417 crore out of Indian government securities under the Fully Accessible Route (FAR) during September and October. This move marks a notable shift in sentiment after significant buying earlier in the year, as overseas investors adjust their portfolios in response to changing global economic conditions.
The primary trigger for this shift has been the repeated deferral of India’s inclusion in the Bloomberg Global Aggregate Index. Earlier in the year, expectation of this entry had attracted significant passive investment, as global funds positioned themselves for the inclusion. When the timeline for this inclusion was pushed back—with the provider citing a need for market reforms to become more embedded—the immediate incentive for these passive funds faded, leading to the current cooling in demand.
Beyond the index narrative, the investment landscape has faced pressure from global macroeconomic factors. Investors are closely monitoring rising US Treasury yields, which have made dollar-denominated assets more attractive compared to emerging market debt. When returns on US bonds rise, the relative appeal of Indian debt often diminishes for international fund managers. Additionally, the depreciation of the Indian rupee against the dollar has added another layer of complexity. A weakening currency reduces the total returns for foreign investors, leading them to adopt a more cautious approach.
Despite the recent two-month sell-off, it is important to note the broader context. Cumulative net investment in FAR securities for the current fiscal year remains in positive territory. This indicates that the recent exit is more of a correction after the earlier speculative run-up rather than a complete withdrawal from the Indian bond market.
Looking ahead, investors may monitor a few key variables that will likely influence future fund flows. These include the stability of the Indian rupee, trends in global crude oil prices which impact India’s inflation, and any new communication regarding the timeline for the global bond index inclusion. These factors will remain critical in determining whether foreign investors return to the market in the coming quarters.